What Is a Legal Data Room and How to Choose the One for Your Needs?

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virtual data room for legal, litigation data room, legal data room

Security breaches around the globe are hitting historically high levels and things are not getting better. In just the first nine months of 2023, the number of data breaches in the US increased by 20% compared to 2022. This calls for new solutions when it comes to data security, especially in such industries as law. 

This article investigates how a legal data room can ensure not only the security of confidential legal data but also the efficiency of collaboration on the legal team and more. 

Keep reading to learn what is a legal virtual data room, how it’s different from free cloud storage solutions, what benefits it can bring, and how to choose one for your needs.

What is a virtual data room for lawyers?

A virtual data room (VDR) for lawyers or a legal data room is a virtual data room software that offers dedicated features and services for the legal industry. 

It is a secure online repository used for storing and sharing sensitive legal documents and confidential data during legal proceedings and other legal transactions. Learn more about what is a data room. These transactions can include mergers and acquisitions, corporate due diligence, litigation processes, intellectual property cases, and other confidential business dealings.

Insight: Virtual data rooms for the legal industry vary in pricing and feature sets. It is important to consider your company’s unique demands to make the right choice.

Before the virtual data room’s appearance, law firms and legal professionals used a traditional physical data room. However, it was costly and time-consuming to maintain such data storage. Moreover, it was difficult to ensure 100% security for sensitive documents as physical data rooms are prone to data breaches due to human mistakes or natural disasters.

That’s why shifting from physical data storage to virtual data rooms was a logical part of the digitalization strategy for many law firms.

Check the best data room solutions

TOP
Providers
Features
1
Detailed audit trails
Built-in redaction
8 levels of granular access controls
Auto notifications for new activity
Remote purge and wipe
Full-text search with OCR
Multi-project management
Document labels
30 days of free trial
2
5 levels of access controls
Two-factor authentication
Single Sign-On
Dynamic watermarks
Document labels
Advanced search filters
Q&A functionality
14 days of free trial
3
Session timeout
AI redaction
File versioning
Q&A functionality
Real-time audit trails
File self-destruct
Multi-format support
14 days of free trial

Why are free cloud storage services not suitable for legal use?

Why pay for a legal data room when there are so many free cloud-based services? The answer is quite simple — security.

Public-access file exchange platforms accommodate millions of users daily. The sheer volume of users creates a proportional risk of hacker attacks and data leaks. Cyber risk rates increase each year, often affecting globally renowned companies and products.

As of May 2024, there were 35,900,145,035 known records breached so far. On top of that, the average cost for a data breach keeps rising — it was $4.45 million per data breach in 2023, which is a 15% increase over three years. What’s more, 65% of law firms fall victim to a cyber incident.
All these only highlight the importance of the security of a virtual data room for law purposes. Although the free-access data handling platforms continue evolving and enhancing their security, their efforts are insufficient.

Legal firms require utmost confidentiality, which makes public services an unsuitable choice. However, exemplary security practices are not the only benefit of a virtual data room for lawyers.

The benefits of a legal data room

A legal virtual data room offers the following advantages:

  • Absolute confidentiality. An established data room for legal purposes will implement the best practices for safe file-keeping. Top-level security combines state-of-the-art technology and advanced physical data-storing facilities, which ensures that confidential legal documents such as financial records or tax information stay secure and private.
  • Straightforward organization. Virtual data rooms make accessing, organizing, and viewing documents very easy. Legal teams manage documents seamlessly by using offered features and templates and spending less time switching between tools and platforms. This results in a faster and more effective deal flow.
  • Convenient centralization. A legal data room control dashboard is a one-stop shop for all file access management, communications, and task planning. Observing the big picture often serves as an asset in optimizing legal procedures and prioritizing correctly.
  • Streamlined diligence. The intricate due diligence process can be a lot more transparent with a well-structured virtual data room for lawyers. Various tools and access control options help eliminate the need for external services and traditional data rooms.
    Enhanced communication. Modern legal data rooms step beyond their original data storing and sharing purpose. Law firms can now facilitate data gathering, live discussions, and even full-scale board meetings.
legal data room features

Data rooms for law firms use cases

The VDR’s advantages, such as improved confidentiality, organization, communication, and many other helpful features create limitless usage possibilities. Here are some of the most common use cases of VDR in the legal industry.

1. Mergers and acquisitions 

Law firms use data rooms to facilitate legal due diligence by securely sharing documents between the buyer and seller. This includes financial statements, contracts, intellectual property, and other critical documents. Multiple parties can access the data room to review and comment on documents, making the M&A process more efficient. 

What’s more, virtual data rooms allow for managing multiple M&A transactions simultaneously, which makes the legal work only more productive.

VDR tip: Use granular permissions to ensure that only authorized individuals have access to specific documents, protecting sensitive information during the due diligence process.

2. Litigation and legal proceedings

Data rooms are used to store and manage evidence, including documents, emails, and other relevant files. Lawyers can collaborate with clients and other legal teams, ensuring everyone has access to the latest materials and case-related documents.

VDR tip: Enable detailed audit trails to track document access and modifications, ensuring transparency and accountability in case preparations.

3. Corporate law

Law firms use data rooms to manage and share confidential documents required for regulatory filings and disclosures during initial public offerings (IPOs). They also organize and share information during corporate restructuring or bankruptcy proceedings.

VDR tip: Utilize document versioning to keep track of changes and ensure that everyone is working with the most up-to-date information.

4. Intellectual property (IP) management

Data rooms store documents related to patent applications, trademarks, and other IP assets. They also facilitate the secure sharing of IP-related documents with potential licensees or buyers.

VDR tip: Implement watermarks on documents to minimize unauthorized sharing and ensure the authenticity of the shared files.

5. Real estate transactions

Law firms use data rooms to share property-related documents such as titles, contracts, and inspection reports with buyers, sellers, and legal teams. This facilitates the due diligence process by providing a secure platform for reviewing property-related data.

VDR tip: Organize documents into structured folders to make it easy for stakeholders to find and review the necessary information quickly.

6. Compliance and regulatory filings

Data rooms help law firms ensure that all documents are properly stored and accessible for regulatory reviews and audits. They also manage compliance documents and facilitate communication with regulatory bodies.

VDR tip: Set up automated notifications for any updates or changes to compliance documents to ensure all stakeholders are promptly informed.

7. Secure communication

Law firms use data rooms for securely sharing sensitive documents and communications with clients. They also facilitate internal collaboration among different teams within the law firm, ensuring secure access to important documents.

VDR tip: Use secure Q&A sections within the VDR to handle confidential queries and discussions without the risk of information leakage.

8. Risk management

Data rooms provide detailed audit trails that help law firms track document access and modifications and enhance security and accountability. They also ensure that sensitive documents are stored securely, protecting against data breaches and unauthorized access.

VDR tip: Regularly review and update user permissions to ensure that only current and relevant legal team members can access documents that are highly confidential and sensitive.

The key features of a virtual data room for lawyers 

Let’s briefly go over the must-have legal data room features.

FeatureHow does it help?
Documents heat mapOptimize the process by evaluating which legal data room users and sections are the most active.
Collaboration/IntegrationSeamlessly merge the virtual data room for lawyers with Salesforce, MS Teams, Slack, and others.
Drag-n-drop file uploadSave time by uploading documents and folders in bulk. Use auto-indexing to make the virtual data room’s data easy to navigate.
Request importsImport the existing diligence request lists from Excel in a couple of clicks.
Custom permissionsAdjust viewing, downloading, and printing rights for each document and user.
Full-text searchFind the necessary information faster by searching keywords and phrases throughout the entire legal data room.
Track integration progressMake sure all stakeholders and others with access to the legal data room are on the same page.
WatermarkingEnable automatic watermarks to protect the document throughout its existence. 
Fence-viewEliminate the risk of unsolicited viewing by only displaying the central part of the document. 
Granular document permissionsEstablish detailed access policies for every document. A good virtual data room for lawyers can feature up to eight protection levels.
Time and IP restrictionsLimit access to the legal data room by enforcing a time window or IP address restriction.
NotificationsQuickly notify necessary users about any changes in files, started discussions, and upcoming events.

How to choose a legal data room?

When choosing the virtual data room for lawyers, pay attention to the following factors: 

  • Compliance. Ensure a legal data room of your choice has adequate compliance. This includes but is not limited to ISO 27081, FINRA, and SOC 1 or SOC 2.
  • Security features. Look for strong encryption, granular access controls, two-factor authentication, and audit logs at least to protect sensitive information.
  • Ease of use. Choose a VDR for law with an intuitive interface, drag-and-drop functionality, bulk uploads/downloads, and mobile accessibility.
  • Streamlined document management. Prioritize features like advanced search, indexing, version control, and document previews for efficient document management.
  • Collaboration possibilities. Ensure the platform offers annotations, comments, Q&A sections, and real-time updates to facilitate effective collaboration.
  • Quality customer service. Look for 24/7 support via multiple channels, comprehensive training resources, and onboarding assistance to ensure smooth operation.
  • Cost-effectiveness. Evaluate transparency of pricing, scalability options, and availability of a free trial to ensure the data room is cost-effective.

Top 3 virtual data rooms for law firms

Now, let’s briefly review the top legal data room providers you can consider:

  • Ideals. Ideals is known for strong security measures, brilliant customer service, and an intuitive interface. Some of their features include built-in redactions, 8 levels of granular permissions, activity tracking, and in-app live chat support. They offer an intuitive platform design with powerful document management capabilities and collaboration features such as annotations, real-time updates, and advanced Q&A sections.
  • Datasite. Datasite for law firms ensures a seamless experience both with managing legal documents and collaborating on them. It offers such features as  AI search and redaction, trackers and Excel-based checklists, and the Sandbox feature, which makes the management of large volumes of legal data a breeze. Additionally, it offers robust security features including strong encryption, granular access controls, and detailed audit logs.
  • Firmex. Firmex ensures litigation, M&A, and other legal cases are handled with ease. They ensure seamless document management with such features as effective search and indexing, version control, and document previews. They also ensure security with such features as watermarks, built-in redaction, 6 levels of granular access controls, and single sign-on. 

Summing up

Let’s now briefly summarize the main points from the article:

  • A legal data room is a virtual data room solution with dedicated features for the law industry. Such VDRs especially focus on the security of legal data.
  • Among the benefits the usage of a legal data room can bring are absolute confidentiality, streamlined diligence, improved collaboration, and convenient centralization.
  • The main law data room use cases include M&A, corporate law, intellectual property management, litigation, real estate transactions, compliance and regulatory filings, risk management, and secure communications.
  • When choosing the legal data room for your needs, pay attention to its compliance, document management, and security features, ease of use, cost-effectiveness, quality of customer service, and collaboration capabilities.
  • Top legal data room providers include Ideals, Datasite, and Firmex.

References

  1. “2020 Year End Data Breach QuickView Report” by RiskBased Security. https://pages.riskbasedsecurity.com/hubfs/Reports/2020/2020%20Year%20End%20Data%20Breach%20QuickView%20Report.pdf
  2. Sep, 2014. “The evolution of virtual data rooms in M&A” by Justin Tinker. https://www.financierworldwide.com/the-evolution-of-virtual-data-rooms-in-ma
  3. International Organization for Standardization ISO Central Secretariat. https://www.iso.org/standard/61498.html
  4. Financial Industry Regulatory Authority Corporation. https://www.finra.org/compliance-tools

Author

Ronald Hernandez

Founder, CEO at dataroom-providers.org

Data room selection & optimization expert with 10+ years of helping companies collaborate more securely on sensitive documents.

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